3 Reasons Hulu Plus is No Threat to Netflix

Last week’s official unveiling of the Hulu Plus paid app for the iPad and iPhone touched off a spirited round of commentary and analysis over possible implications the move could have for Netflix. Piper Jaffray analysts said they expect Hulu Plus to be largely complementary to Netflix’s streaming service, given Hulu’s focus on broadcast TV content and Netflix’s focus on movies. Citigroup’s Mark Maheny, however, called Hulu Plus, “the first new significant competitive challenge to [Netflix] in some time.”

But while Hulu Plus could complicate life a bit for Netflix in the near-term, in the long run, Netflix’s strategy for building a broad-based subscription business that delivers premium video content over the Internet is likely to prevail over the Hulu Plus approach.

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Here are three key reasons to bet on Netflix:

1) Paid content follows eyeballs, not the other way around. Netflix has always concentrated on building its subscriber base, first through its core DVD-by-mail service, then by embedding its streaming application into a broad array of consumer electronics devices, confident the content would follow. That subscriber base is now up to 14 million and the content is indeed beginning to arrive: This week’s deal with Relativity Media gave Netflix streaming customers access to first-run movies in the pay-TV window shows.

Hulu’s focus, meanwhile, has been on building its content library in the hopes it will attract users. That strategy worked well enough for free content, but content alone is unlikely to persuade users to become paying Hulu Plus subscribers. Movie and TV content simply isn’t exclusive enough online for most people to pay for it directly. However, those already paying for a service they find useful can almost always be fed more content.

2) Content is not king, services are. Much as it may pain rights owners, people are generally much more willing to pay for content services than they are for the content itself. Many low-rated cable networks would likely disappear if ever forced into a purely a la carte world, for instance, because not enough people would pay directly for their content. Those networks exist now because they are able to share in a portion of the revenue generated from pay-TV service fees. Netflix itself is a testament to the importance of services over content. Nearly all of the DVD content available from Netflix was also available from Blockbuster. Netflix thrived by offering a better service.

In competing for subscribers then, the the key issue for Netflix and Hulu Plus is not the value of the content each holds, but the value of the service they can deliver. And here it’s likely to be no contest. Netflix can offer content across multiple platforms, from DVD to PC to connected TV, is sitting atop a vast database of millions of rental transactions and features a highly sophisticated recommendation engine. Any content it currently lacks will naturally follow its subscriber base just as Relativity’s content has. It will be a very long time before Hulu Plus is able to offer anything like that consumer value proposition and its starting 14 million subscribers behind.

3) In retail, location matters. What’s true in brick-and-mortar retailing is true in virtual retailing as well. Market share corresponds with real estate. Netflix has assiduously built out its base of virtual storefronts by embedding its app on a wide variety of devices, from Blu-ray players and connected TVs, to the iPhone and iPad, and soon, evidently, to Android devices.

While Hulu Plus may appear on some game consoles, the company is unlikely ever to match Netflix’s in-home reach, given its parent companies’ leeriness at letting it into the living room. As connected TVs, Blu-ray players and set-top boxes gradually make the living room the focus of online video delivery, the lack of a TV-embeddable app means Hulu Plus risks being shut out of the most desirable locations.

None of this means Hulu Plus won’t ever find an audience. But in terms of challenging Netflix over the long term as a subscription-based streaming video platform, forget it.